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NAFTA's Chapter 11 Makes Canada Most-Sued Country Under Free Trade Tribunals

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The AbitibiBowater saw mill in Mackenzie, British Columbia May 15, 2008. The pulp-and-paper company won the largest settlement against Canada under NAFTA investor-state dispute mechanisms: $130 million. | CP

Canada is the most-sued country under the North American Free Trade Agreement and a majority of the disputes involve investors challenging the country’s environmental laws, according to a new study.

The study from the left-leaning Canadian Centre for Policy Alternatives (CCPA) found that more than 70 per cent of claims since 2005 have been brought against Canada, and the number of challenges under a controversial settlement clause is rising sharply.

The investor-state dispute settlement mechanism contained in NAFTA’s chapter 11 grants investors the right to sue foreign governments without first pursuing legal action in the country’s court systems, in order to protect foreign investors from discrimination. Drafters of the 1994 treaty included the provision to protect U.S. and Canadian investors against corruption in Mexican courts.

Critics argue that the mechanism limits governments from enacting policies on legitimate public concerns such as the environment and labour or human rights, and that negotiations are often carried out in secret.

The CCPA believes the federal government’s strong commitment to Chapter 11 and its willingness to settle and compensate claimants is encouraging more cases against Canada. There were 12 cases brought against Canada from 1995 to 2005, while in the decade since there have been 23.

The 35 claims brought against Canada comprise 45 per cent of the total number of claims under NAFTA. That’s significantly more than Mexico’s 22 or the 20 brought against the U.S.

Canada has lost or settled six claims paying a total of $170 million in damages, while Mexico has lost five cases and paid out $204 million. The U.S.,meanwhile, has won 11 cases and has never lost a NAFTA investor-state case.

“Thanks to NAFTA chapter 11, Canada has now been sued more times through investor-state dispute settlement than any other developed country in the world,” said Scott Sinclair, who authored the study.

MORE: Six times Canada had to pay foreign investors under NAFTA’s Chapter 11

Even when countries win the legal costs of fighting an investor claim, it can cost millions of dollars. Sinclair estimates Canada has spent $65 million defending such claims over the past two decades.

About 63 per cent of the claims against Canada involved challenges to environmental protection or resource management programs that allegedly interfere with the profits of foreign investors.

The government has lost some of these environmental challenges and has been forced to overturn legislation protecting the environment.

In 1997, the Ethyl Corporation, a U.S. chemical company, used chapter 11 to challenge a Canadian ban on the import of MMT, a gasoline additive that is a suspected neurotoxin and which automakers have said interferes with cars’ diagnostic systems. The company won damages of $15 million and the government was forced to remove the policy.

A year later, U.S.-based S.D. Myers challenged Canada’s temporary ban on the export of toxic PCP waste, which was applied equally to all companies. Canada argued it was obliged to dispose of the waste within its own borders under another international treaty. However, the tribunal ruled the ban was discriminatory and violated NAFTA’s standards for fair treatment.

There are currently eight cases against the Canadian government asking for a total of $6 billion in damages. All of them were brought by U.S. companies.

Many of those current challenges involve domestic environmental protections such as the promotion of renewable energies, a moratorium on offshore wind projects on Lake Ontario and Nova Scotia’s decision to block a contentious mega-quarry.

In one case, a Calgary headquartered company that is registered in the U.S., Lone Pine Resources Inc., is suing the Canadian government for $250 million over Quebec’s moratorium on natural gas fracking, which applies equally to foreign and domestic companies. Lone Pine argues it was not consulted before the ban nor compensated for its wasted investment or loss of potential revenue.

Sinclair argues that the threat of challenges under chapter 11 has a chilling effect on public interest regulation, which will only worsen unless political and legal action is taken.

“Buoyed by their past successes, foreign investors and their legal advisors are now turning to NAFTA chapter 11 with increasing frequency and assertiveness,” he wrote.

“Unfortunately, compared to other parts of the world, there is surprisingly little political debate about the corrosive influence of ISDS on public policy and democracy in Canada.”

Canada is embarking on a new generation of multinational treaties such as the European Union free trade deal and the Trans Pacific Partnership, both of which contain investor-state dispute settlement (ISDS) systems. While governments can be sued under ISDS, there is no similar recourse for states to hold foreign investors, often wealthy corporations, accountable for their actions.

Six times Canada had to pay foreign investors under NAFTA’s Chapter 11:

Case: Ethyl Corp. (1997)
Amount awarded: US$13 million, out-of-court settlement.
What happened: The U.S. chemical company challenged a Canada-wide ban on import and trade of the gasoline additive MMT, a suspected neurotoxin. Following a preliminary judgement against Canada, the government repealed the ban, issued an apology and paid a settlement.

2. Case: S.D. Meyers (1998)
Amount awarded: CDN$6.05 million, plus interest and compensation.
What happened: The U.S. waste disposal firm challenged a temporary Canadian ban on the export of toxic PCB wastes, something the country was obliged to do under an international environmental treaty. The tribunal ruled that Canada violated standards of treatment under NAFTA.

3.Pope and Talbot (1998)
Amount awarded: CDN$870,000.
What happened: The U.S. lumber company challenged Canada’s lumber export rules implemented under the Canada-U.S. softwood lumber agreement. The tribunal ruled Canada violated NAFTA’s minimum standards of treatment.

4. Mobil Investments/Murphy Oil (2007)
Amount awarded: Not yet determined, but damages continue to accrue as long as violating guideline in effect.
What happened: The oil investors argued that Canada’s guidelines requiring energy companies to invest in research and development in Newfoundland and Labrador are inconsistent with NAFTA rules. The tribunal ruled in favour of the investors and Canada is liable to pay damages.

5. AbitibiBowater (2009)
Amount awarded: CDN$130 million in settlement — the largest NAFTA-related settlement to date.
What happened: The pulp and paper company closed its last mill in Newfoundland and Labrador in 2008 and the provincial government enacted legislation to return its timber and water rights to the Crown and expropriate some of its lands and assets associated with water and hydroelectric rights. Abitibi was to be paid fair market value for the assets.The company launched a NAFTA claim and the government decided to settle without going to court.

6. St. Marys (2011)
Amount awarded: $15 million.
What happened: The company alleges its Canadian subsidiary was the victim of political interference when it tried to open a quarry near Hamilton, Ont., after residents grew concerned about the groundwater. The provincial government issued a zoning order preventing the site from being converted into a quarry and the company claimed that was unfair and discriminatory. The parties reached a settlement in 2013 that saw the company withdraw the claim in exchange for compensation from the Ontario government.

Source: Canadian Centre for Policy Alternatives

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